Workers lacking a 401(k) may not be without a retirement plan for long — more states are adopting programs in an effort to improve Americans’ retirement security.
Only about half of the workforce has access to a 401(k), according to AARP, leaving many without an easy, efficient and — possibly most important—automatic way to save for the future. States have begun to take a more active role in retirement planning by offering employers without retirement plans a way to give their employees these accounts. Auto-IRA plans, which mimic 401(k) accounts, have stolen the spotlight.
“While these programs are still in their early stages of implementation, we will soon cross $1 billion in assets administered and more than 1 million workers saving who probably wouldn’t be doing so were it not for these state programs,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University. More than 200,000 employers have state-sponsored plans, she added.
State-sponsored plans have accumulated more than $647 million in assets, a vast majority of which — $630 million — are from the programs in California, Illinois, Oregon and Connecticut, according to the Center for Retirement Initiatives. In total, 18 programs have been enacted since 2012 (16 states and two cities), including mandatory auto-IRA plans, voluntarily payroll-linked IRAs, multiple employer plans (known as MEPs) and marketplace plans.
In 2022, two states — Hawaii and Delaware — enacted state-sponsored retirement programs, and 21 states had proposed legislation to implement new programs, change current ones or create study groups. The center expects numerous states to introduce legislation in 2023 for the same purpose.
Small businesses often blame the lack of retirement benefits on the fees and cost associated with maintaining and offering these plans. Only half of workers at companies with less than 50 people have access to an employer-sponsored plan, a Cerulli report found. The larger the company, the more likely it is to offer this benefit.
These plans offer employees a way to automatically contribute to retirement accounts, just like a 401(k). “The states have demonstrated that when given the opportunity to save, workers will save,” Antonelli said. IRAs on their own may be an option for workers without employer-sponsored plans, but not everyone is likely to set up and consistently contribute to the account without that nudge.
Workers aren’t the only ones who benefit, nor are the employers, who have another perk to attract new hires. States are positioned to reap rewards from these programs, as the cost to assist older Americans can be significant. The more Americans save for the future, the less likely they are to rely on government assistance when they’re older. Over the next 20 years it could cost the government $1 trillion in new spending to support the elderly, Antonelli said.
But not all companies support these programs, as they may feel forced upon employers. Other critics argue there are better options available to employees with more attractive investment choices and fees. And while state-sponsored auto-IRA accounts resemble 401(k) plans, they aren’t as generous with contribution limits—in 2023, workers can put as much as $22,500 in a 401(k) if they’re under 50 (with an additional $7,500 if they’re older than that), whereas contributions to IRAs cannot exceed $6,500 (or $7,500 for those 50 and older).
OregonSaves was the first state program to run, and is now at the last stage of the rollout, which includes the group of smallest businesses.
“We want to be allies,” said Tobias Read, Oregon state treasurer. “We want to make sure they look at this as an opportunity. Undoubtedly, some people will be skeptical but when we get feedback like ‘that wasn’t so bad,’ we count that as a victory.”
Small businesses often don’t have the bandwidth to explore retirement options when owners are busy managing all of the other day-to-day tasks and responsibilities, but these programs can help them offer a retirement plan to their workers, the treasurer said.
There are also areas for improvement, others say. For example, beyond the ability to invest for the future, many 401(k) plans come with tools to help people financially plan, such as resources for budgeting and calculators to make sense of contributions and withdrawals. Once state plans mature and state governments have recouped the costs of program setup, they should consider similar features in financial wellness and education, the Cerulli report said. Even when people had access to a 401(k), many did not save because they didn’t think they had enough money to do so, or they had competing financial priorities, the report stated.
What’s happening at the state level may be the reason for the federal government’s interest in retirement reform. Congress enacted Secure 2.0 in December, a retirement-focused law with provisions intended to help workers save and entice employers to help. The legislation was a follow up to the Secure Act, passed in 2019, which was the first retirement-centric law in decades.
“The success and growth in the number of state programs is generally viewed as having contributed significantly to the momentum that has propelled two rounds of federal retirement reforms in just the past three years,” Antonelli said.
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